Any Bright Ideas Out There?

By Bernard Baumohl

The U.S. economy is in a mess and no one in Washington seems to have a clue how to get out of it. There was a flash of good news last week, when the government reported that the gross national product grew at a 2.4% annual rate in the third quarter. But it was quickly doused by a torrent of dismal reports showing last summer's rebound to be short-lived. Sales of new homes plunged 12.9% in September despite the lowest mortgage rates in 14 years. Consumer- confidence sagged in October to levels not seen since the height of the Persian Gulf war, and the unemployment rate for the month crept up 0.1%, to 6.8%. Even normally reticent Federal Reserve Chairman Alan Greenspan admitted in a speech last week that the economy had recently turned "demonstrably sluggish."

Reviving this economy is proving to be one of the toughest challenges of the century. In previous downturns, policymakers were able to jump-start the engine through tax cuts, higher government spending and falling interest rates. But this time around, such techniques either haven't worked or are difficult to implement. Though interest rates have been falling since 1989, overextended banks won't ease up on new loans. Budget deficits exceeding a quarter of a trillion dollars discourage tax cuts or spending increases for fear of renewed inflation and higher interest rates.

What to do? Here are the recommendations of 10 economists from around the U.S.

Roger Brinner

chief economist

Data Resources

economic-research firm

Lexington, Mass.

-- Federal Reserve should cut interest rates 1% immediately.

-- Congress should not cut personal income tax rates. It would be too costly for the budget, heighten worries of inflation, and raise long-term interest rates.

-- Fund extended unemployment benefits to the jobless, and pay for them by cutting fat in other federal programs like Amtrak and government pensions.

-- Introduce a 10% investment-tax credit specifically for manufacturing equipment.

Don Conlan

president

Capital Strategy Research

economic-consulting firm

Los Angeles

-- Don't tamper -- under any circumstances -- with last year's accord to reduce the budget deficit. Changing it now would open a Pandora's box of troubles and raise inflation fears.

-- Greenspan's Federal Reserve, too cautious with monetary policy so far, should allow short-term rates to fall a little more.

Fred Conrad

chief economist

Eastman Chemical

producer of plastics, fiber and chemicals

Kingsport, Tenn.

-- Do nothing. Let the economy rehabilitate on its own from the excesses of the 1980s. Quick fixes could end up doing more harm than good.

-- Falling interest rates this year should be given more time to take effect.

Kathleen Cooper

chief economist

Exxon

Irving, Texas

-- Do not change personal income tax rates or increase government spending. The budget deficit is already too high.

-- Focus more on monetary policy. The Federal Reserve should gradually continue to reduce short-term interest rates.

John Godfrey

chief economist

Barnett Banks

Jacksonville

-- Fed Chairman Greenspan should add a lot more money to the economy and forget about what it does to interest rates.

--Do not change personal income tax rates.

-- Lower the capital-gains tax from 31% to 20% for all types of business investments. That should help real estate, banks and thrifts. Don't worry about minuscule losses in tax revenues. Reviving the economy is much more important than a modest increase in the budget deficit.

David Hale

chief economist

Kemper Financial

Chicago

-- Allow banks, whose troubles are hindering the recovery, to earn interest on reserves placed with the Fed.

-- Cut the capital-gains tax to 20%. Such a cut would stimulate real estate and help the financial industry, as well as the Resolution Trust Corporation, out of a jam.

-- Don't meddle with personal income taxes.

-- The Fed should continue to lower interest rates.

Kenneth Mayland

chief economist

Society National Bank

Cleveland

-- Lower interest rates to whatever it takes to increase the supply of money and credit in the economy.

-- Do not cut personal income tax rates.

-- Reduce the capital-gains tax to 20%. Do not pay for this by slowing federal spending elsewhere. The pickup in business activity from the tax cut should produce enough revenues to pay for it.

Brian McDonald

director

Bureau of Business & Economic Research, University of New Mexico

Albuquerque

-- Pass the bill to extend unemployment benefits.

-- Don't cut taxes -- on anything. The financial markets would react adversely and push long-term rates up again.

-- Bank regulators must ease up. Do not force banks to set aside reserves for losses on loans still paid on time, even if the value of the collateral has fallen.

Lynn Michaelis

chief economist

The Weyerhaeuser Co.

forest-products manufacturer

Tacoma

-- Lower interest rates 1% -- immediately.

-- End Wall Street's concerns over rising budget deficits by halting all talk of large tax cuts.

-- Government should set up a special fund task force to find ways to increase bank lending.

Edward Yardeni

chief economist

C.J. Lawrence

investment firm

New York City

-- Accelerate the depreciation allowance on real estate to relieve the biggest problem, the stagnant real estate market.

-- Roll back personal income tax rates to Reagan-era levels.

-- Pass a capital-gains tax cut.

-- Don't worry about widening the budget deficit for now. Let's get out of the slump first; otherwise the recession will continue and the deficit will grow on its own.

-- Lower interest rates more. The federal-funds rate is still 5 percentage points away from zero.